August 3, 2010 in Business

Drought, fire hinder Russian wheat

Loss could mean higher prices, but U.S. farmers are likely to benefit
Nataliya Vasilyeva Associated Press
 

MOSCOW – A severe drought destroyed one-fifth of the wheat crop in Russia, the world’s third-largest exporter, and now wildfires are sweeping in to finish off some of the fields that remained.

Expectations that Russia will slash exports by at least 30 percent have sent wheat prices soaring, and that’s good news for farmers in the world’s largest wheat exporting country – the United States.

The higher wheat prices may mean that Americans and Europeans pay slightly more for bread, but the bigger burden will fall on people in the Middle East, Africa and parts of Asia, analysts say.

The Russian Grain Union said Monday that it expects exports to decline to 15 million tons, down from 21.4 million tons in 2009, while the SovEcon consultancy sees them at 12 million tons and other analysts at even less.

“Russia has become the price-maker on the market,” said Dmitry Rylko, director general of the Institute for Agricultural Market Studies, who says he expects minimal exports.

Russian farmers have little incentive to export. Even though grain prices are rising on world markets, with further gains Monday, they are growing even faster in Russia, so many farmers are holding on to their harvested grain in the hopes of still higher profits.

The majority of the damage to Russia’s wheat crop has been caused by the drought, one of the worst in decades as much of the country suffers through the hottest summer since record-keeping began 130 years ago. But in recent days, wildfires raging through much of western Russia have spread into farmland and there are fears that more fields will be lost.

The director of a small state farm outside Moscow said fire destroyed its entire wheat crop one night before they planned to harvest.

“The fruits of the year’s labor of the farm went up in smoke – this is very painful,” said Pavel Grudinin, director of the Lenin State Farm, said Monday on Russian television. He said a woman who worked as a horticulturist at the farm was weeping in his office.

State farms have been marginalized since the fall of the Soviet Union and most of Russian grain production comes from big, often multinational companies. After years of stagnation, Russian agriculture has been on the upswing as Russian firms and foreign investment funds have started to buy up land and upgrade production.

Wheat prices on the Chicago Board of Trade surged in July by 42 percent, the biggest monthly gain in more than a half century, and are now the highest they have been in nearly two years. With no immediate end in sight for the drought in Russia, analysts expect prices to continue to rally.

Wheat futures rose more than 5 percent Monday to $6.975.

George Lee, who manages the agriculture fund at Eclectica Asset Management in London, said the United States and other exporters, principally Argentina and Australia, are set to be “big gainers,” Lee said, while Canada, the third-largest global exporter, and the European Union are not looking at their best harvests.

He said the high wheat prices will hit hardest in the Middle East, Africa and parts of east Asia – or anywhere where governments subsidize the cost of food.

“I don’t think U.S. consumers will notice the price difference very much,” he said.


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